Thursday, May 9, 2013

Questioning conventional wisdom

I recommend this fascinating interview with Harvard development economist Dani Rodrik. In his own words, he is someone who has worked from within the economic mainstream (especially where methods are concerned) but has not been afraid to accept logical conclusions that go against conventional wisdom, which is often not actually supported by any logic or theory. As he says,

...where I tend to part company with many of my colleagues is with the policy conclusions I reach. Many of my colleagues think of me as excessively dirigiste, or perhaps anti-market. A colleague at Harvard’s Economics Department would greet me by saying “how is the revolution going?” every time he saw me. A peculiar deformation of mainstream economics is the tendency to pooh-pooh the real-world relevance of all the theoretical reasons market fail and government intervention is desirable.

This sometimes reaches comical proportions. You get trade theorists who have built their entire careers on “anomalous” results who are at the same time the greatest defenders of free trade. You get growth and development economists whose stock in trade are models with externalities of all kinds who are stern advocates of the Washington Consensus. When you question these policy conclusions, you typically get a lot of hand-waving. Well, the government is corrupt and in the pockets of rent-seekers. It does not have enough information to undertake the right kinds of interventions anyhow. Somehow, the minds of these analytically sophisticated thinkers turn into mush when they are forced to take seriously the policy implications of their own models.

This is an interesting point. In essence, he is suggesting that some of the policy conclusions generally supported by the economic mainstream (deregulation, more markets, etc.) actually find no real foundation in theory. Yet many economists support these conclusions anyway for other reasons. He goes on to talk about the social forces within the profession:

There are powerful forces having to do with the sociology of the profession and the socialization process that tend to push economists to think alike. Most economists start graduate school not having spent much time thinking about social problems or having studied much else besides math and economics. The incentive and hierarchy systems tend to reward those with the technical skills rather than interesting questions or research agendas. An in-group versus out-group mentality develops rather early on that pits economists against other social scientists. All economists tend to imbue a set of values that tends to glorify the market and demonize public action.

What probably stands out with mainstream economists is their awe of the power of markets and their belief that the market logic will eventually vanquish whatever obstacle is placed on its path. As a result, economists tend to look down on other social scientists, as those distant, less competent cousins who may ask interesting questions sometimes but never get the answers right. Or, if their answers are right, they are so not for the methodologically correct reasons. Even economists who come from different intellectual traditions are typically treated as “not real economists” or “not serious economists.”

So the hurdles for the economists that want to depart from the conventional path are pretty high. Above all, they must play by the methodological rules of the profession. That means using the language of mathematics, the standard optimizing, general-equilibrium frameworks, and the established econometric tools. They must pay their dues and demonstrate they remain card-carrying members in good standing.

Now, Rodrik does suggest that he likes to work within this framework for various reasons. But what he then says is most interesting, touching back on the point of how widely held policy views link back to actual economic theory. Often, he suggests, they have no foundation at all in such theory, which is often employed more as a rhetorical tool than anything else:

In my own case, every piece of conventional wisdom I challenged had already become a caricature of what sounds economics teaches us. I wasn’t doing anything more than reminding my colleagues about standard economic theory and empirics. It was like pushing on an open door. I wasn’t challenging the economics, but the sociology of the profession. For example, when I first began to criticize the Washington Consensus, I thought I was doing the obvious. The simple rules-of-thumb around which the Consensus revolved had no counterpart in serious welfare economics. Neither were they empirically well supported, in view of East Asia’s experience with heterodox economic models. When you questioned supporters closely, you first got some very partial economic arguments as response, and then as a last resort some political hand-waving (e.g., “we need to get the government to stop doing such things, otherwise rent-seeking will be rife…”). My argument was that we should take economics (and political economy) more seriously than simply as rules of thumb. Economics teaches us to think in conditional terms: different remedies are required by different constraints. That way of thinking naturally leads us to a contextual type of policy-making, a diagnostic approach rather than a blueprint, kitchen-sink approach.

Similarly, when I questioned some of the excessive claims on the benefits of globalization I was simply reminding the profession what economics teaches. Take for example the relationship between the gains from trade and the distributive implications of trade. To this day, there is a tendency in the profession to overstate the first while minimizing the second. This makes globalization look a lot better: it’s all net gains and very little distributional costs. Yet look at the basic models of trade theory and comparative advantage we teach in the classroom and you can see that the net gains and the magnitudes of redistribution are directly linked in most of these models. The larger the net gains, the larger the redistribution. After all, the gains in productive efficiency derive from structural change, which is a process that inherently creates gainers (expanding sectors and the factors employed therein) and losers (contracting sectors and the factors employed therein). It is nonsensical to argue that the gains are large while the amount of redistribution is small – at least in the context of the standard models. Moreover, as trade becomes freer, the ratio of redistribution to net gains rises. Ultimately, trying to reap the last few dollars of efficiency gain comes at the “cost” of significant redistribution of income. Again, standard economics.

Saying all this doesn’t necessarily make you very popular right away. I remember well the reception I got when I presented my paper (with Francisco Rodriguez) on the empirics of trade policy and growth. The literature had filled up with extravagant claims about the effect of trade liberalization on economic growth. What we showed in our paper is that the research to date could not support those claims. Neither the theoretical nor empirical literature indicated there is a robust, predictable, and quantitatively large effect of trade liberalization on growth. We were simply stating what any well-trained economist should have known. Nevertheless, the paper was highly controversial. One of my Harvard colleagues asked me in the Q&A session: “why are you doing this?” It was a stunning question. It was as if knowledge of a certain kind was dangerous.

Years earlier, when I wrote my monograph Has Globalization Gone Too Far? I had been surprised at some of the reaction along similar lines. I expected of course that many policy advocates would be hostile. But my arguments were, or so I thought, based solidly on economic theory and reasoning. A distinguished economist wrote back saying “you are giving ammunition to the barbarians.” In other words, I had to exercise self-censorship lest my arguments were used by protectionists! The immediate qestion I had was why this economist thought barbarians were only on one side of the debate. Was he unaware of how, for example, multinational firms hijacked pro-free trade arguments to lobby for agreements – such as intellectual property – that had nothing to do with free trade? Why was it that the “barbarians” on one side of the issue were inherently more dangerous than the “barbarians” on the other side?

But ultimately, the reward of challenging conventional wisdom that has gone too far is that you are eventually proved right. The Washington Consensus is essentially dead, replaced by a much more humble approach that recognizes the importance of locally binding constraints. And many of the arguments I made about the contingent nature of the benefits from trade and financial globalization are much closer to the intellectual mainstream today than they were at the time.

Excellent read, Positive site, where did u come up with the information on this posting?I have read a few of the articles on your website now, and I really like your style.www.rn-ds-partnership.co.uk |

In the future, it may well be possible to have a far more accurate understanding of the economy. Morever, instead of using interest rates, and taxation as a means to control inflationary pressures special instantaneous electronic controls could be far more effective in extremis to control it en direct. If this is possible it implies that new unearned money could be created electronically, and phased in without serious inflation, and could have huge implications for society, and the world......................See my p2pfoundation entry on Transfinancial Economics

Nice information, valuable and excellent design, as share good stuff with good ideas and concepts, lots of great information and inspiration, both of which I need, thanks to offer such a helpful information here. http://www.theweddingpaperdivas.org |

Twitter follow

Search This Blog

Loading...

This blogexplores the potential for the transformation of economics and finance through the inspiration of physics and the other natural sciences. If traditional economics has emphasized self-regulation and market equilibrium, the new perspective emphasizes the myriad positive feed backs that often drive markets away from equilibrium and cause tumultuous crashes and other crises. Read more about the idea.

Please see my new book FORECAST (cover below)

Who am I?

Physicist and science writer. I was formerly an editor with the international science journal Nature and also the magazine New Scientist. I am the author of three earlier books, and have written extensively for publications including Nature, Science, the New York Times, Wired and the Harvard Business Review. I currently write monthly columns for Nature Physics and for Bloomberg Views.